Chapter G: Institutions, governance and administration

G2. State tax reform

Key points

The States need to have revenue to fund their expenditure and should have autonomy over how some of this revenue is raised. Because of factor mobility across States and the desire to have a less complex tax system across the federation, some taxes are more appropriately assigned to the States than others.

Although the States currently have access to significant taxes, there are problems with either the quality of these taxes or the way they are levied. Increasing the rates of tax on existing State taxes would not be a sustainable way of funding services in the future.

The States would be better placed to meet cost pressures in the future if they received the revenue from a broad-based cash flow tax. This could fund the abolition of a number of State taxes. The States could also raise some revenue from tax base sharing of the personal income tax, with the Australian government keeping a share of the consumption tax revenue.

Reforms to State taxes should be implemented over time through an intergovernmental agreement to allow for revenue stability as taxes are reformed and to facilitate good policy outcomes across the federation.